The importance of accounting information on security price determination is of interest to both security analysts and accountants. Beaver [3], Downes and Dyckman [6], Gonedes [12], Beaver and Manegold [4], and others have investigated the possible relationships between accounting information and market information. Rosenberg [26] has shown the existence of extra-market components of covariance in security returns while Simkowitz and Logue (S–L) [28] have derived the interdependent structure of security returns. However, none of this research has explicitly investigated how the empirical results can be affected by alternative accounting profitability measures within an industry simultaneously.

In an efficient capital market, prices fully reflect available information and adjust to new information in a rapid and unbiased fashion. As a result, prices provide unbiased estimates of the underlying values. No known trading rule or security selection strategy which uses only publicly available information would provide an investor with the ability to earn, on average, positive “abnormal” returns in a market that is efficient in the semi-strong sense. Thus, a finding that common stocks selected, using a readily available, widely disseminated set of rules which requires only publicly available information for decision-making purposes, earn, on average, positive abnormal returns represents strong contradictory evidence regarding the semi-strong form of the efficient markets hypothesis.

In a recent paper [3] we developed a theory of financial intermediariesas information producers. We argued that financial intermediaries are one class of market participants who specialize in the production of information and sell that informationtofirms with investments to finance which can profit from its distribution. In order to focus on financial intermediation, we sacrificed considerable generality in our model ofcompetitive information production in capital markets. In particular we assumed that there were only two types of assets available in the market known as type A and type B firms. Second, we assumed that information would be produced about all assets by only one information producer or that information was a declining cost industry. The approach we utilized is actually a special case of what has been called a screening or certification process (see Stiglitz [6] and Viscusi [7]), and what we prefer to callsorting. The sorting market is a market where high value and low value assets are distinguished by market participants who specialize in sorting. It is similar, but not identical, to the process of signaling developed by Spence [5] and applied to financial markets by Ross [4] and Bhattacharya [1]. Yet, the extant literature on sorting has, by and large, ignored the opportunity for thosewho stand to lose from sorting to offer side payments to thwart the sorting process. While the problem of side payments may be of minor significance for some applications of sorting and signaling models, the prospect of side payments appears to be an important if not crucial issue infinancial markets.

In this paper prices of corporate bonds are decomposed into elements associated with (1) the pure price of time, (2) the default risk of the agency rating class to which the bond is assigned, and (3) the unique risk and ancillary features of the bond itself.

Markets for exchange typically evolve over time, and the organized security exchanges in the United States have evolved in such a manner as to give specialists a major role as market makers. Specialists are responsible for maintaining a fair and orderly market in the securities listed on an exchange. They specify prices to reflect supply and demand and adjust these prices in response to shifts in supply and demand.

The idea that various characteristics of financial contracts and institutions can be explained as a rational response to problems created by information asymmetries has received a great deal of attention recently. A central theme of the literature in this area is that while moral hazard may hamper the direct transfer of information between market participants, information may be conveyed indirectly through the actions of market participants. For example, the characteristics of the insurance contract purchased may convey information as to riskiness of the insured. Recognition of the possible effects of information asymmetries has provided valuable insights into the role of financial intermediaries and the characteristics of the contracts they offer. In this paper we apply this literature to an analysis of the market for bank loan commitments. Through our analysis we are able to explain the use of various payment options such as fees and compensating balance requirements associated with loan commitments. Extensions of our analysis into the pricing of other bank services are also explored.

The use of third-party quality certification, or sorting, to overcome asymmetrically informed markets was examined recently by Viscusi (Bell Journal, Spring 1978, pp.277–279) in a labor market context. Campbell and Kracaw (CK) have extended the Viscusi equilibrium and applied it to the potentially more interesting financial markets context. CK examine the incentives for low-quality firms to offer side-payments (a financial economists' term for bribes) to information producers, or sorters, to prevent resolution of the information asymmetry. Introducing bribes formally into the analysis maylead to a better understanding of some financial institutions; an earlier CK paper is such an examination (Journal of Finance, September 1980, pp. 863–882). Perhaps, in other applications of the sorting model, other previously unjustifiable financial activities and their associated payments might be seen as side-payments for some sorting activity.

The mean-variance model is precisely consistent with the expected utility hypothesis only in the special cases of normally distributed security returns or quadratic utility functions. There is little evidence, however, that security returns follow normal distributions (see [13] for references) and quadratic preferences can be shown to generate implausible results, exhibiting increasing absolute risk aversion in the Pratt [ll]–Arrow [1, 2] sense and displaying negative marginal utility after some finite wealth level. In addition, Hakansson [4] has shown that single–period, mean-variance-efficient portfolios can have disastrous consequences over time—even when return distributions are stationary. Such criticisms of the mean-variance approach within the Von Neumann-Morgenstern framework have prompted several writers to suggest that investors maximize the expected value of utility functions with more “realistic” properties, while others have criticized the single-period focus of the model. One popular alternative utility function is the logarithmic function which exhibits decreasing absolute risk aversion and (conveniently) leads to myopic decision processes through time (i.e., investors treat each period as if it were the last, basing investment decisions on that period's wealth and return distributions only [8, 4]). (Other utility functions with constant relative risk aversion—such as the power function—also imply myopic decision rules within a multiperiod setting.)

Over the past years the beta coefficient has been widely used as a measure of systematic risk in investment and portfolio analysis. The validity of using the beta coefficient as the proper measure of systematic risk is dependent upon the assumption that the beta coefficient is stationary over time. Unfortunately, this assumption has been challenged by a number of empirical studies which have found the beta coefficient to be unstable over time. Examples of such empirical investigations are those documented by Blume [4], Levy [12], Levitz [11], Baesel [2], Altman, Jacquillat, and Levasseur [1], and Roenfelt, Griepentrong, and Pflaum [16]. Most recently, Fabozzi and Francis [9] reported that some security beta coefficients tend to be random over time. Their findings also support the regression tendency of the beta coefficients towards the mean over time, as found by Blume [4]. Thus, because the beta coefficient is changing over time, the use of the ordinary least-squares (OLS) method in investment and portfolio analysis will yield an inefficient estimate of systematic risk. Furthermore, the OLS estimates of security and portfolio residual risks will be influenced by the variability of beta coefficient. Therefore, the purpose of this paper is to investigate the relationship between the variability of the beta coefficient and portfolio residual risk, and hence to provide a real picture of the process of portfolio diversification under the condition of beta nonstationarity. It is shown that the use of the OLS method to estimate security and portfolio residual risks will produce an incorrect conclusion that larger residual risks tend to be associated with higher variability in the beta coefficient.

The objective of this study is to determine the impact of money market conditions and a bank's regulatory environment on the interest rates banks charge on their loans. This is accomplished through the analysis of the effect of these impacts, in a multiperiod framework, on a bank's optimal investment and borrowing decisions and the minimum required rate of return on its asset portfolio.

This study focuses on the risk-return characteristics of investments in the common stocks of U.S.–based multinational corporations (MNCs) and U.S. national corporations (NATLs). Findings follow from a comparison of the risk-adjusted performance of MNCs and NATLs using the framework of the capital asset pricing model (CAPM). Results of this comparison challenge assertions of earlier writers that marginal benefits or advantages accrue from investments in MNCs as compared to NATLs.

Boquist, Racette, and Schlarbaum [3] and Livingston [6] show that a security systematic risk may be expressed as a function of its duration. These results have led to research examining the role of duration in explaining systematic risk, but Lanstein and Sharpe [5] indicate that Livingston's expression relies on the implicit assumption that extra-market covariances between securities are insignificant. Lanstein and Sharpe argue that such an assumption is unwarranted. They find a significant negative relationship between extra-market covariances and differences in duration between paired samples of common stock. Their paper suggests that duration may be associated with unsystematic risk and that any relation between duration and systematic risk is more complex than implied in [3] and [6].

The stationarity of beta factors has received considerable attention in the financial economics literature. One particular area of study has been to investigate how the measured stationarity of beta factors changes over data sets of varying lengths. By increasing the length of the estimation period, sampling fluctuations may be reduced; however, the probability of beta factors having changed will increase. The optimal data set length, then, involves a trade-off between these two opposing phenomena. Baesel [2] reported the empirical finding that the stationarity of beta was, indeed, dependent upon the estimation period length over which beta factors were estimated. He found, using transition matrices that beta stationarity was an increasing function of the calendar period used for beta estimation. In this paper, analytic expressions will be derived to explain how and when this empirical phenomenon arises. Conditions will be presented for beta stationarity to increase with calendar period length, and it will be demonstrated that beta stationarity will not increase indefinitely with estimation period length. An identical condition is required for beta stationarity to be an increasing function of the subsequent calendar period length. This phenomenon was empirically investigated by Roenfeldt, Griepentrog, and Pflaum [6], and the analysis presented here explains, in part, their findings.

The purpose of this study is to examine the reaction of the Israeli stock market to a major economic reform that took place in Israel on October 28, 1977. On that Friday afternoon, after the closing of all businesses, TV and radio programs were interrupted fora major address by the Treasury Minister. The thrusts of the reform were the liberalization of foreign currency control, the unification of the exchange rates, and the floatingof the Israeli pound.

This paper shows that the integer efficient frontier for capital budgeting problems can be computed using a modified Markowitz approach. It is shown that if the quadratic integer capital budgeting problem is reformulated as a parametric programming problem on the right-hand side of the return constraint, the problem indicated by Baum, Carlson, and Jucker [1] is eliminated. The traditional Markowitz approach is to formulate the problem as an objective function parametric programming problem. Baum, Carlson, and Jucker [1] show that the traditional approach cannot generally be applied to solve quadratic zero-one integer capital budgeting problems. They show that this approach may fail to identify some efficient points. The failure results from the objective function parametric programming approach. Even though the objective function and the right-hand side parametric programming approaches are equivalent in the continuous case, they may not be equivalent in the integer case.

The paper by Lakonishok and Sadan represents an interesting attempt to link major economic reform to fundamental issues in financial valuation. Changes instituted by the Israeli government in the fall, 1977, are related to subsequent changes in security returns on the Tel Aviv Securities Exchange. The authors employ an event study methodology to investigate the market reaction to the announced reform, the market reaction to raw data and partially analyzed data, and the market reaction to easily acquired data and less easily acquired data.

The algorithm leading to a solution of the above question has been known at least since Kaplan's 1965 tutorial [5] on Sturm's theorem. The Sturm-Kaplan method has the power to count all zeros on the real axis between any two specified limits. A significant problem may arise, however, when one tries to generate the Sturmian functions which play a central part in the Sturm-Kaplan method. The rather arduous nature of the task derives from the necessity to perform several polynomial (synthetic) divisions. As the number of cash flows involved in the analysis increases, the time and effort required to determine the Sturmian functions increase as well.

The measures of risk proposed by Vinso are properly motivated with a concern for the dynamic nature of a firm's operations. The measures are subject to restrictions in application and interpretation, however. Some of these restrictions were caused by the choice of the Cornish-Fisher expansion to incorporate the adjustment for skewness and the resulting quadratic equation. The problems created by the existence of multiple real or imaginary roots to this equation are unresolved in the paper.

Apart from these problems, the measures do not represent probabilities of ruin; they often significantly understate the true probability. We have shown that the measures related to εrp are applicable only to firms with positive-drift processes and argue that they should be evaluated in a multivariate context.

The search for a distribution which accurately describes the behavior of stock price returns has generated a considerable amount of controversy. While it is well known that the traditionally used assumption of lognormality deviates in systematic ways from the empirically observed—the latter has fatter tails and a larger concentration of mass near zero—none of the alternatives that have been proposed over the years (Stable Paretian—Mandelbrot [5], Poisson mixture of; lognormal distributions—Press [10], scaled T distribution—Praetz [9], lognormal with nonstationary variance—Rosenberg [11], subordinate stochastic process—Clark [2]) has gained general acceptance.